Many small businesses need to take out a loan from the bank. If your small business needs to take out a loan, make sure it’s not a callable loan. Callable loans have an extra amount of risk that you might not be anticipating.
What is a Callable Loan?
A callable loan is just like any other loan you can get from a bank with one exception. The bank can “call” the loan and demand full payment of the remainder of the loan immediately. While this practice is legal if disclosed in the terms of the loan, a bank likely will never call the loan unless you fail to meet the loan’s terms. For example, one or more late payments might trigger a call on the loan. In practice, if you pay your loan payments on time, you probably won’t ever have your loan called, but that’s up to the bank to decide.
The Two Types of Callable Loans
There are two different types of callable loans. The first is called a demand loan. Demand loans are usually one-year lines of credit, but could be longer or shorter. During the term of a loan drawn on this line of credit, the bank can call your loan at any moment.
The other type of callable loan is called a term call option. With this type of callable loan, the bank reviews the loan at predetermined regular intervals. For example, if your loan is 20 years long, the bank might choose to review the loan every four years. During each interval and review process, the bank can call your loan and demand full payment, but between intervals, the bank can’t call your loan.
Why Do Callable Loans Exist?
Callable loans exist to reduce the financial risk to the bank. If the management of the bank decides that it is safer for the bank to force you to pay the full balance now rather than let you pay monthly payments for the remainder of the loan, the call provision is exercised. This can happen for economic or market reasons. But more commonly, it is because your personal financial creditworthiness deteriorates. Just remember, callable loans protect the bank and they’ll use them if they need to.
What to Do If You Have A Callable Loan?
If your business gets a loan from the bank that’s callable you should do a few things to protect yourself. First, keep all documentation related to the loan in case there comes a time where you need to review the fine print. Next, to reduce the risk that your loan gets called, always make the minimum payment on time. Even better, if you can, make the payments ahead of schedule and pay more than the minimum. This keep the bank happy and reduces their risk with each passing month. Finally, you should do all that you can to ensure that your credit rating stays the same or improves during the time that you have the callable loan to further reduce the risk that the loan gets called.
Callable loans are a special type of loan that allows the bank to demand full payment if certain criteria aren’t met. Though this can be a riskier type of loan for you the borrower, often you can get these types of loans for lower interest rates than non-callable loans. You should talk to a financial professional to decide if a callable loan is a good fit for your business before getting one from the bank.